By: August Peterson, AIM Student at Marquette UniversityDisclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.
• SoFi Technologies, Inc. (NASDAQ: SOFI) operates an online platform providing home loans, personal loans, private student loans and student loan refinancing, credit cards, investments, insurance products, and other financial services.
• Uncertainty remains persistent as SoFi has yet to acquire a bank charter and the firm’s largest division of revenue, personal loans, is heavily exposed to interest rate risk and disruption to the demand of new loans.
• A stronger balance sheet is evident—the use of SPAC proceeds to pay down its revolving credit line leaves the firm with just under $1 billion in cash and $3 billion in debt as of Q3 2021, leaving SoFi with ample resources to invest in itself.
• SoFi is desperately jumping on its first-mover advantage to build a financial services monopoly by introducing new product offerings and creating cross-platform incentives, but to no avail. The majority of SoFi’s clients still only use a single product or service within the firm.
Key points: Chamath Palihapitiya, CEO of Social Capital and the catalyst to SoFi’s SPAC in February of 2021, took an early interest in the company as a panacea to the problems of our current banking infrastructure has with meeting the needs of US consumers. These solutions, which Palihapitiya believes are addressed completely by SoFi, are low to no fees, fair and transparent lending, and a full suite of products that act as a one-stop-shop for all financial service needs. Twelve days ago, Palihapitiya sold 15% of his stake in the company.
Why? Initially pitched as the fast-growing, one-stop-shop FinTech platform seeking to benefit from powerful cross-selling advantages and strengthened customer retention through implicit switching costs, SoFi has yet to prove a sustainable competitive advantage in the financial services industry. The company’s current core business model is easily replicable; the majority of SoFi’s revenues are generated from its lending business (~52% Q3 ’21 revenue), which operates as a loan-to-distribution model where the company either sells or securitizes its loans for a gain. Personal loans were the largest driver of Q3 revenue, up 166% above last year’s total loan originations. SoFi is actively and aggressively expanding its breadth across new product offerings, but because the company has demonstrated these offerings can be brought to market quickly, a competitive advantage cannot be sustained until these offerings are mature and reward spending catalyzes high customer retention across all products. In short, SoFi needs to grab its first-mover advantage as a financial services monopoly.
Have they been? Q3 added 377,000 new members on the SoFi platform, the second-highest quarterly increase in company history (behind Q2 2021). Membership is primarily driven by a 178% YoY growth in SoFi Money accounts, which the company believes is its primary entry point for consumers. Revenue from the company’s financial services segment is up 290% from last year after introducing cryptocurrency accounts, credit cards, and other new products.
While these numbers sound bullish, it’s important to focus on what metrics point to an irreplicable business model, which SoFi outlines to be a one-stop-shop for all financial services. The key to building a sticky customer-relationship model is founded on reward spending and cross-platform incentives. SoFi has already been implementing incentive structures; credit cards only offer full reward points if the cardholder has a brokerage, crypto, or cash management account with the company, checking accounts only pay interest if $500+ is deposited monthly, and a .25% rate reduction on qualified loans are offered to existing SoFi clients. Despite these efforts, the majority of SoFi’s clients only use a single product or service with the firm.
What has the stock done lately?
Since being pitched into the AIM small-cap fund, SoFi is down ~13%. In the last six months, the stock has oscillated between $23.89 and $13.75 before settling at around $16 today. The sale of Chamath Palihapitiya’s shares led to a drop in the stock’s price to $17.87 from $20.87 on November 19th, 2021.
Past Year Performance: SoFi is up 56.13% in the last year, catalyzed by the acquisition of Galileo, which has seen accelerated growth since being acquired by the firm. Valuations of the company remain unreliable as the company isn’t expected to be profitable until 2023, according to some estimates, and free cash flow has yet to be positive.
SoFi needs to focus on aggressive marketing and reward spending to justify the high growth assumptions by 2023 when the street estimates the firm to reach profitability. Because the firms’ personal loans division operates on an originate-to-distribute model, meaning the loans made to the company are either securitized or sold for a gain, the majority of SoFi’s revenue is exposed to interest rate risk and disruption to the demand of new loans. With the Fed announcing an interest rate rise in the first half of 2022, fewer consumers and banks will be willing to demand the same quantity of loanable funds, adversely affecting SoFi’s revenue. Despite being a high-growth FinTech SPAC with high expectations for disruption, SoFi still has a lot to prove before it can gain a sustainable competitive advantage in this industry.